DEALBOOK; In a Gamble For Cash, Sears Plans To Sell Stores

By PETER EAVIS

Published: February 24, 2012

Sears Holdings moved on Thursday to allay fears that it could run low on cash this year, announcing plans to sell stores in transactions that the company says could raise nearly $800 million.

But the deals also highlight the major challenges that Sears faces as it tries to stop a multiyear slump in its operations, analysts said.

Sears may be giving up its most profitable stores in exchange for a quick cash infusion today. In one of the transactions, Sears also expects current shareholders to foot the bill, potentially leaving them more exposed to the troubled retailer.

''As a matter of fact, spinoffs like these could leave Sears with a very unprofitable core Sears U.S. business,'' said Mary Ross Gilbert, an analyst with Imperial Capital, a brokerage firm.

These moves come as the company's largest investor, its chairman, Edward S. Lampert, has been increasing his personal stake in the company. Mr. Lampert engineered the merger of Kmart and Sears, Roebuck, in a $11 billion deal in late 2004, and his hedge funds now own 61 percent of the stock.

The price of Sears shares jumped 18.7 percent on Thursday, to $61.80, even as the company reported weak financial results.

For the year, Sears reported a loss of $3.14 billion, a number that included $2.7 billion of charges, compared with a profit of $133 million for 2010. The fourth quarter had a $2.44 billion loss, compared with a profit of $382 million the previous year.

The company also reported an annual decline in revenue, its fifth in a row. Such trends are a stark reminder that Sears's problems have deepened since it came under Mr. Lampert's control.

Critics say that under Mr. Lampert the company has not spent enough to update its stores and that now, in the face of intense competition, Sears is in danger of permanently falling out of shoppers' favor.

In a letter to shareholders, Mr. Lampert said: ''We made it through the financial crisis and the housing crisis. Now we intend to make it through our current challenges and restore confidence in the company.''

As Sears's problems have persisted, all eyes are on its cash flows as investors weigh its chances of survival. The company tacitly acknowledged the attention on its cash on Thursday.

It does not normally hold conference calls to discuss financial results, but Lou D'Ambrosio, Sears's chief executive, said one of the reasons it did so after the latest earnings release was ''to make our funding strategy clear.''

Sears's operations were most likely a drain on cash last year, said Ms. Ross Gilbert.

Sears said it had $277 million of adjusted earnings before interest, taxes, depreciation and amortization, or Ebitda. But Ms. Ross Gilbert said that excluded $383 million of cash contributions to its pensions. Including that would put Ebitda deep in negative territory. And if Sears's top line continues to decline, the loss could be even deeper this year.

Analysts are also keeping an eye on Sears's suppliers, as well as the companies, called factors, that make cash advances to the suppliers based on the goods they sell to Sears. If vendors and factors become wary of Sears's creditworthiness, the retailer may have to pay suppliers cash upfront for goods, which could be a huge drain on liquidity.

''The focus of the call was for the vendors, and steps taken were all focused on near-term cash generation,'' said Gary Balter, a retail analyst with Credit Suisse.

But Sears also has sizable cash sources. It had about $2.5 billion available on two credit lines at the end of January, though the company may draw much of that this fall as it spends large amounts stocking its stores ahead of the holidays.

This is where the property sales announced Thursday become important. If they all occur, and Sears succeeds in cutting costs and slashing inventory, the company could have a sizable cash cushion in the fall. That would bolster confidence and perhaps persuade suppliers not to demand upfront cash payments for their goods.

One of the asset sales appears to be in the bag. General Growth Properties, a mall operator, has agreed to buy 11 Sears properties, which will raise $270 million.

However, the other deal - which aims to raise as much as $500 million and is slated for later this year - is less straightforward. In effect, Sears aims to sell its smaller Hometown and Outlet stores to any interested Sears shareholders. The company said Mr. Lampert's hedge funds expected to participate and exercise their rights in full.

But the danger is that Sears may be selling some of its best properties, which could mean even worse operating results in the future. On the conference call on Thursday, a Sears executive declined to say what proportion of its stores was profitable.

The outgoing Hometown and Outlet stores were profitable last year, producing as much as $80 million of Ebitda, Sears said.

The big question now is how many more of these types of sales Sears could do. More than 120 properties cannot be sold because they are effectively locked in an insurance subsidiary. Others may be harder to sell because they are in less attractive malls.

Furthermore, agreements with Sears's creditors may contain restrictions on assets sales. A Sears spokeswoman said, ''The domestic credit agreement contains customary limitations on asset sales.'' But she added, ''We do not believe our debt agreements place material restrictions on us that would prevent us from taking value-adding actions, such as those announced today.''

At any rate, Ms. Ross Gilbert expects the cash-raising measures to alleviate the concerns of Sears's suppliers for now. But she added, ''They basically buy Sears another year.''

This is a more complete version of the story than the one that appeared in print.

PHOTO: A Sears store in Mentor, Ohio. Share prices jumped even as the company reported weak results. (PHOTOGRAPH BY DANIEL ACKER/BLOOMBERG NEWS) (B4)